Fed’s Bullard: Inflation Target Consistent With Fed’s Mandate

The Federal Reserve‘s recent adoption of a formal inflation target is entirely in line with its congressionally determined mandate, Federal Reserve Bank of St. Louis President James Bullard said Monday.

“Inflation targeting is perfectly consistent with the Fed’s dual mandate,” Bullard said, and this policy is well suited to deal with the contingencies the central bank will face.

“Naming an explicit numerical inflation target is neither hawkish nor dovish,” Bullard said. He explained, “It is simply a recognition that the central bank controls the medium- to long-run rate of inflation, and that in order to minimize uncertainty the central bank may as well say what it is trying to achieve” rather than keep its target hidden.

Earlier this year, the Fed finally acknowledged that it wants to keep inflation around 2%, formalizing what had been referred to as an implicit goal. The adoption of the target had been the topic of much discussion for years, and regardless of their disposition, Fed officials have agreed on the prudency of keeping inflation around this level.

“Since the central bank controls the inflation rate, there seems to be little to be gained from “hiding” the inflation target,” Bullard said, because keeping it under wraps simply introduces uncertainty into the economy.

Bullard’s comments came from a press release and materials associated with a lecture he was to give in Logan, Utah, at an event held by Utah State University’s Jon M. Huntsman School of Business. The official isn’t currently a voting member of the monetary-policy-setting Federal Open Market Committee, and he didn’t address the monetary policy or economic outlook in his prepared remarks.

Bullard spoke ahead of next week’s FOMC meeting. Most economists expect the gathering to be a status quo affair. The Fed isn’t expected to announce any new policies, and most believe it will carry forward with its program to sell short-dated securities to buy longer-dated bonds, as well as maintain its conditional commitment to keep rates very low through much of 2014. Economists hold to that view in the face of a string of recent Fed speeches that showed a wide divergence of opinion about what the Fed should do in the future.

In his prepared remarks, Bullard noted the discussion over monetary policy is more complicated in the current environment where changes in interest rates aren’t the main focus of monetary policy making. For some time now, with interest rates resting at zero, the heavy lifting in Fed actions has been done via communications strategies, emergency lending programs and bond buying to expand the balance sheet.

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